Effective January 1, 2023, an applicant or licensee for a Contractors State License will have to file or have on file with the Contractors State License Board (“CSLB”) a bond in the amount of $25,000.00 instead of the current $15,000.00. Where applicable, it also requires a Bond of Qualifying Individual in the sum of $25,000.00, increased from the current $12,500.00.
New Law
On September 28, 2021, Senate Bill 607 was signed into law changing California’s Contractor License Bond requirements from $15,000.00 to $25,000.00 and a Bond of Qualifying Individual from $12,500.00 to $25,000.00. (See Section 7071.6 of the California Business and Professions Code.)
The California Contractors License Bond requirement was last increased from $12,500.00 to $15,000.00 by Senate Bill 467 which took effect January 1, 2016.
Senate Bill 610 (Glazer) Study
Each year, the Assembly and Senate Business and Professions Committees hold joint sunset review oversight hearings to review the boards and bureaus under the Department of Consumer Affairs (DCA). The sunset review process provides the DCA, Legislature and interested parties to discuss the performance of the boards and make recommendations for improvements.
In preparation for the California Legislature’s 2019 sunset review hearings, the CSLB submitted its Sunset Review Report in December of 2018. In that report, the CSLB indicated that greater consumer protection could be realized with an increase in the contractor bond as construction projects can easily exceed $15,000 in costs or potential financial injury to a consumer.
In September of 2019, the Governor approved Senate Bill 610, tasking the CSLB to conduct a study to determine whether the $15,000 bond amount was sufficient (or whether it should be increased) and to submit its findings and recommendations to the appropriate policy committees of the Legislature by January 1, 2021.
To determine whether the $15,000 bond amount was sufficient the CSLB studied:
1. Consumer Complaint Data,
2. The Cost of Typical Home Remodeling Projects, and
3. CSLB Bond Payment Claim Information.
Consumer Complaint Data
The CSLB opens approximately 20,000 complaints a year. Complaints are received from different sources and can involve a variety of construction projects, including public works, commercial and residential. The CSLB classifies approximately 80% of complaints each year as “reactive” (filed by a consumer that has hired a contractor) and 20% as “proactive” (filed by third parties that direct the CSLB to jobsites for compliance checks). Between the two types of complaints, approximately 90% involve residential projects.
The CLSB reviewed the value of construction contracts for its “reactive” complaints filed by residential consumers between 2015 to 2020.
The highlights of that review are:
- Approximately 48.9% of complaints involved contracts over $15,000.
- Most CSLB consumers (52.7%) file complaints for contracts between $5,001 and $50,000.
- Each year there has been an increase in filed complaints for contracts between $15,001 and $25,000.
The Cost of Home Remodeling Projects
The CSLB reviewed the cost of different remodeling projects in the year 2020 in the Pacific U.S. (HI, AK, CA, OR & WA).
The CSLB found that the average cost of a significant remodeling project is $60,424 (replacement of doors: $2,000 to $3,000; siding replacement or entry level bathroom remodel: $15,000 to $25,000; room additions or upscale room remodels: exceed $100,000).
Bond Payment Claims
Bond companies are required to notify the CSLB within 30 days of payment on the $15,000 contractor bond, the $100,000 LLC bond, and the $12,500 bond of qualifying individual.
Between January 1 and September 1, 2020, the CSLB was notified of 782 bond claim payments, 243 (or 31%) were investigated due to a licensee protest. The claims covered payouts to any of the beneficiaries named in Business and Professions Code Section 7071.5.
The CSLB reviewed the bond claim payments and concluded the following:
1. Nearly 10% (127) of contractors each year have 2+ claims against their bond.
2. Nearly 20% (252) of claims each year max out the $15,000 bond.
3. Over 22% (290) claimants each year are limited to the aggregate liability cap of $7,500 because another party has a valid claim to the bond as well.
Conclusion
The CSLB concluded that the $15,000 bond requirement was insufficient and as a result, Senate Bill 607 was signed into law increasing the Contractor License Bond requirement to $25,000.
On September 28, 2022, the CSLB distributed notices to 203 surety companies with instructions on how to automatically increase all licensees’ bonds and bonds of qualifying individuals currently on file with the CSLB.
As the end of year is fast approaching, it may be a good time for contractors to reach out to their broker or surety company to budget for an increase in bond premium.
The Senate Bill 610 (Glazer) Study can be found here.
CSLB #22-10 Industry Bulletin can be found here.
If you have any questions or comments regarding this article, please do not hesitate to contact Leah Schoen at The Green Law Group, LLP.
Please note that this article is only intended to provide some general educational information. For your particular legal questions, be sure and consult with an attorney.
Leah Schoen
(805) 306-1100 ext. 126
leah@thegreenlawgroup.com